Page 440 - F2 Integrated Workbook STUDENT 2019

Chapter 19

Example 7.3

Year ended 31 December 20X1

Due to the length of time between the transfer of control of the car and the
payment date (three years), this contract includes a significant financing
component.

The consideration includes payment for the car and the provision of finance.

Revenue should be recognised when the performance obligation is satisfied but
the amount recorded will be discounted to present value using the rate at which
the customers borrows money i.e. 5%.

Revenue should be recognised at $3.456 million ($4m × 0.864) on
31 December 20X1. Dr Revenue $3.456m Cr Receivable $3.456m.

Year ended 31 December 20X2

Interest income will be recorded to reflect the financing arrangement offered to
Larry. Interest income will be recorded at $3.456m × 5% = $0.173m.
Dr Receivable $0.173m Cr Other income $0.173m.

The statement of financial position at this date will show a receivable of
$3.629m.

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